Six Flags Over Radio

The amusement park Six Flags went belly up over the weekend.

One of my readers immediately sent me a very thoughtful narrative of how the fate of Six Flags and the radio industry parallel each other.

For example – Six Flags carries more debt ($3.4 billion) than it has equity. It cannot make a $288 million payment now due thus the Chapter 11 filing.

In radio, consolidated groups are over leveraged up to their Yin-Yang with debt for which they appear unable to make their next payments to lenders.

Six Flags has $3 billion in assets but banks like HSBC, Mellon, Citigroup, Barclays, hedge fund Renaissance Technologies LLC funded this magical mystery tour without regard to the usual and predictable cycles of economic downturns.

Ditto the Wall Street lenders who pumped money into radio for acquisitions in spite of unrealistic multiples that were paid to acquire stations and without regard to whether the debt they were accruing could be managed.

Six Flags lenders made a fortune on fees while they were wearing their rose colored glasses.

You know how lenders cleaned up while driving suckers like the Lee & Bain, Teddy Forstmann at Citadel and the Dickey family deeper into debt.

Six Flags was a great business.

It operated 21 properties, hosted 25 million guests, bagged $1 billion in revenue and actually made a healthy $283 million in operating income before interest, depreciation and principle payments. That’s a whopping 23% margin, but not good enough to keep up with debt payments.

Radio is still a good free cash flow business with little overhead except for – debt. Many stations throw off positive cash flow but radio companies don’t generate the super huge numbers they need to clean up their debt obligations.

Many radio companies have previously refinanced their debt at terms favorable to lenders in order to avoid judgment day --- the day that is coming for sure at a radio consolidator near you.

Six Flags management has been working together for the past four years – a plus.

Radio’s upper management has been together for most groups since the start of consolidation or before 1996. Management stability is a negative for radio because the handful of CEOs who wound up with all the power (and protection of super stock voting rights) is pretty lame. These are not the top execs a successful board of directors would pick out of a lineup – for sure.

Six Flags previous management is the group that dug their company into a grave with an eight-year run overpaying for theme parks.

Sound familiar?

Looking ahead, the Six Flags scenario provides those interested in radio with a view of what is ahead.

In bankruptcy, Six Flags parks continue to operate and debt holders take a big write down. Loans are converted to equity at, say, 40% on the dollar. As far as original equity holders are concerned, sorry about your luck. You’re wiped out.

The banks peddling financing get to keep the fees they generated from these suckers.

Radio will be worth pennies on the dollar as well should Chapter 11 be filed. Some lenders will be totally screwed –- some partially screwed – if that’s even a good way to put it.

The fees earned are untouchable.

Lee & Bain went through with the $20 billion acquisition of Clear Channel and they had a chance to get out when banks balked, but they marched right on collecting the fat fees in return for owning a failed company. Now Lee & Bain will probably be shoved aside in bankruptcy, but business goes on in the world of Wall Street investors.

Six Flags will likely get a new team of managers.

Radio needs some, but if the courts appoint caretaker types, that is likely, then it will be only for the purpose of dividing up the remaining crumbs not with the hope of reemerging from bankruptcy once debt is restructured or dismissed.

The newest Six Flags bank-chosen management team will be, as my reader suggested, “passionate about the return of bank debt converted to equity. Money losing parks are quickly closed without regret or prior contractual obligations now voided by bankruptcy. Capital spending is reduced. Operations expenses reduced further with less employee training, less supervision, less maintenance, lower marketing/advertising. Rides are dirty, prices higher, and short-term profitability improves”.

The new radio management team chosen by banks with court oversight may be scarier than seeing John Slogan Hogan running the largest radio group in the world. I don’t think banks even know who good operators are. You and I do. We could suggest names, but the very type of radio manager needed to fix the mess created by consolidators is not likely to be chosen to serve.

Two years from now, the banks will clear their balance sheets of the converted equity. Wall Street will help Six Flags with a new public stock offering. The banks will cash out. Wall Street will make more fees.

Two years from now in radio, stations will be in the process of being returned to their rightful owners, local operators and individuals, who will need – you guessed it – more financing to buy these properties even at 4 times cash flow or less.

More fees for the lenders – even when they lend to the good guys.

Then, somewhere down the line, you can set your clock for Six Flags management to grow the theme park business again. Never mind, the recession is over. Bankruptcy a thing of the past. So, they will take their newly found strong balance sheet and take it to Wall Street banks for another round of fee-based loans.

After all, you’ve got to grow a business to be profitable, right?

In radio, while the consolidated groups will likely be broken up, smaller groups will emerge and once they derive revenues from new media (a must, not an option for future performance), they will be marching back to Wall Street lenders as a new age media company.

Please, invest in us. We’ve bridged the gap between terrestrial radio of old and new media of tomorrow.

Much if not all of the above scenario is likely to play out in the months ahead.

Even the consumer can’t save American companies from the crack they are addicted to – huge loans at unfavorable rates.

This reminds me of the loan sharks that navigate the streets of South Philadelphia looking for people down on their luck with money they need but can never pay back.

Like the Hotel California, you can check out but you can never leave.

American business thrives when it is diverse and small.

Large companies can acquire but can’t seem to operate. Don’t believe me. Believe Peter Drucker.

We’re entering a new period of entrepreneurship where small groups of people can do big things without Wall Street.

Steve Jobs and Steve Wozniak invented Apple in a garage. And while you may argue that they needed Wall Street loans to grow, I would respond that Apple has almost $20 billion in cash reserves. Apple even thinks different when it comes to loan sharks – investment banks.

One Harvard drop out invented Facebook (although Mark Zuckerberg still hasn’t figured out how to make money with it).

A handful of young folks invented YouTube in a garage and made $1.6 billion when Google, the big company with all the money, couldn’t come up with that innovative idea.

Big companies and their lenders are devoid of ideas, strategy and can’t see the future ahead.

Troubled companies – such as radio consolidators – turn to legal loan sharks.

A Mafia loan shark usually will charge 6-10% per week compounded weekly. At first they will give you two weeks to repay, for example you borrow $2000 you will owe them $2100 in 2 weeks. If you can only pay $600 then you will owe $1500 plus the 5% interest per week until paid, so if you make another $600 payment in 2 weeks you will still owe around $1100.

Sounds like Wall Street banking hasn’t strayed far from this model.

So with Clear Channel, Cumulus, Citadel and a handful of other radio groups likely to default on their loan covenants in the next six to nine months, if you want to see what their lives are going to be like, refer to Six Flag’s scenario – it’s how it’s done.

Of course, if you were a victim of consolidation, I can’t think of a better time to get thee to a garage and think different.

Innovation can be sold to these suckers all day and all night.

Just don’t be one of them.

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